Last update: 28th February 2000

Arithmetic target: A target measured by taking the same number of units (expressed in currency for a stock or points for an index) in the measurement distance and applying those units to the point of breakout to determine a minimum expected change in price or index level. See Logarithmic target, below, for an example.

**Ascending triangle:** A triangle with a horizontal
resistance forming the upper boundary, which, if volume is correct
(falling throughout the pattern) and if breakout is correct (not
to close to the apex) can portend a rally.

**Breakout:** A point outside a completed geometric pattern.
Breakout indicates that the pattern in question has been activated
such that it gives a minimum prediction.

**Cascading patterns: **A series of patterns indicating the
extension of trend from short to medium term or medium to long
term. In this configuration, the short term pattern could be any
pattern: a double top or bottom, a head and shoulders (top or
bottom), or even a triangle. The short term pattern then becomes
the head of a head and shoulders top or bottom. A reversal of a
long term trend often begins with a short term pattern. As the
reversal of the trend becomes clearer, a larger, more significant
pattern often develops in casdcading fashion. The phenomenon of
cascading patterns is thus important in confirming the reversal of
a long term trend.

**Channel:** A pattern comprising two parallel lines that
circumscribe a price trend. The parallel comprise a support (the
lower line) and a resistance (the upper line). The channel gives
rise to presumption that price will not pass the support or
resistance. But ultimately, all channels break. Thus the
predictive value of a channel is subject to rules of
interpretation which give a probability of turn or breakout
depending on the relative term of the channel and the geometric
patterns, if any, that are contained within the channel.

**Chart:** A two dimensional representation of the change in
price and turnover or volume of a stock or index.

**Consolidation: **The process in a market where prices
accumulate at a certain level before reversing or continuing.

Consolidation indicates exhaustion of a market move, but it does
not indicate a change in the trend of the market. It is a period
of uncertainty. It may be characterized by either volatility or
the absence of trading. But it is a short term phenomenon.

**Continuation: **The process whereby a market proceeds in
the direction of the current trend after a period of
consolidation. A continuation may be distinguished from a
reversal. A geometric pattern may indicate either a continuation
of a trend or the reversal of the trend.

**Descending triangle:** A triangle with a horizontal support
as the lower boundary, suggesting that a breakout downside is
impending.

**Double bottom:** A geometric pattern comprising two bottoms
resembling a “W” on the chart. The pattern indicates a reversal of
trend from falling to rising. To be valid it must be accompanied
by low volume on the left side and high volume on the right side
and after breakout.

**Double top:** A geometric pattern comprising two tops
resembling an “M” on the chart. It is usually accompanied by
higher volume on the first top than on the second top. However, if
it breaks through the neckline with sufficient margin, it may be
considered valid, notwithstanding the accompanying volume pattern.

**Downside:** A breakout which penetrates a support and
indicates an impending fall in the market is referred to as a
breakout “downside”.

**False breakout:** The phenomenon whereby price breaks out of
a geometric pattern, only to fall back into the pattern before
advancing very far. False breakouts are likely to occur in the
case of a breakout upside that is not accompanied by strong
volume. But they can occur in the case of a downside breakout (ie,
breakout from a top or a from the lower boundary of a triangle)
without warning, most commonly where a triangle breaks out close
to its apex.

**Head and shoulders top:** A geometric pattern comprising a
top forming a left shoulder, a higher top forming a head and third
top being lower than the head, forming a right shoulder. The
pattern indicates a reversal of trend from rising to falling

**Leg support or resistance: **A support or resistance
parallel to a neckline touching a turn that is close to the
neckline. In the case of a head and shoulders top the leg support
can send the price back above the neckline, cancelling the
pattern. The resulting pattern is a head and shoulders top on two
little legs (or feet, if you prefer). The same phenomenon can be
found in reverse head and shoulders patterns and double tops and
bottoms.

**Logarithmic target:** A target measured by expressing the
measurement distance as a percentage and applying that percentage
to the point of breakout. Thus a fall from 10 to 7 within a
geometric top pattern will give a measurement distance of 3/10 or
30%. A breakout at 7 from a valid geometric pattern would give a
prediction of a fall of a further 30%; ie, 2.1 points (or
currency units if we are measuring a stock). Thus the logarithmic
target would be 7 - 2.1 = 4.9. (Compare the arithmetic target for
the equivalent pattern, which would simply take the number of
units in the measurement distance and subtract them from the point
of breakout; ie, 7 – 3 = 4.)

Logarithmic targets are useful in the case of predictions for long term patterns spanning several years such as we have seen recently in Japan (October 1998) and Taiwan ( February 5th 1999).

**Measurement distance:** the interval on a chart between the
two most distant vertical points in a geometric pattern. The
measurement distance is applied to the point of breakout from a
geometric pattern to give a target.

Neckline: A support or resistance line that forms the boundary of
a top or bottom pattern such as double top or double bottom, or
head and shoulders top or reverse head and shoulders. Breakout
occurs when the price of a stock or level of an index passes the
neckline. Measurement of a target is taken from the neckline at
the point of breakout. The measurement distance is taken from the
neckline to the most distant vertical point in the geometric
pattern.

**Pattern **or** Geometric Pattern:** One of a series of
recognized patterns that is formed by joining the price points on
a chart.

In essence, a geometric pattern gives rise to the presumption that
at least one half of a trend has occurred, allowing the trader to
take advantage of the other half of the market move and giving
hope that the trend will continue further by reason of a chain of
patterns.

The geometric patterns comprise the head and shoulders top, reverse head and shoulders, double top, triple top, double bottom triple bottom, triangles, pennants and wedges.

**Pennant:** a small triangle indicating a halfway point in a
rapid market move. The pennant should be preceded by an almost
vertical market move, called the pole. The pole will be the
distance from a breakout from a support or resistance or geometric
pattern to the triangular part of the pennant. In the case of a
pennant pointing up, the pole should be attended by high volume.

**Price:** a point on the chart indicating the price of the
stock traded. Price is represented by the right hand Y axis on my
charts.

**Pullback: **A brief reversal of trend after a breakout from
a pattern. A pullback can confirm the breakout where price returns
to the neckline (or boundary of a triangle) and then rebounds in
the direction of the breakout. In difficult cases, where multiple
necklines can be drawn, a pullback can confirm the location of a
neckline.

**Resistance: **A point on a chart, represented by a straight
line connecting at least two points, at which price may be
expected to turn down. A resistance may be either horizontal or
diagonal. Resistance will be strong or weak depending on factors
such as the number of points touching the resistance and the
period during which the resistance occurs. Thus a long term
resistance touching many points will be a strong impediment to a
medium term rally. Horizontal resistance will only be strong if
volume accompanied the previous occurrence of the price in
question. Diagonal resistance does not depend on volume for its
efficacy.

Resistance at a point on a chart may comprise multiple intersecting lines. These should be considered the strongest of resistances. But alas, often it is only after the event that such multiple resistances can be discerned. Resistance can be inferred by inferring parallelism to a support. (A bit of an art).

**Reversal:** The change in direction of a trend as evidenced
by a geometric pattern.

**Reverse head and shoulders:** A bottom pattern indicating
that a falling trend has reversed into a rising trend. Volume
should increase throughout the pattern for it to be reliable with
the highest surge of volume occurring on the right hand side of
the right shoulder. The reverse head and shoulders is similar in
function to a double bottom, but it has higher predictive value
due to the fact that the neckline can be inferred more readily
(having three points where price touches the neckline, whereas the
double bottom may have only one).

**Support:** The inverse of a resistance (see above): a line
indicating that the price is unlikely to fall below such line.

**Symmetry:** head and shoulders tops and bottoms often
exhibit symmetry in their formation. If a pattern has two left
shoulders, it may be expected to have to right shoulders. This is
especially true of large capital stocks that form patterns over
the course of a year. Further, in the case of long term patterns,
one may expect symmetry in the period of formation of a right
shoulder to an extent similar to that of the left shoulder. Thus
if a left shoulder took six months to form, one might expect the
right shoulder to take a similar period. However, there is no rule
that symmetry shall apply. Symmetry is merely a presumption.

**Target:** an interval on the Y axis of a chart equivalent to
the measurement distance of a pattern indicating the price of a
stock or the level of and index which may be expected as the
minimum change following a breakout from a valid geometric pattern

**Term:** a period for classifying and comparing trends and
geometric patterns. I use the terms long term, medium term and
short term. They are essentially relative terms indicating ranking
forces. A long term pattern has more predictive force than a short
term pattern. A long term trend may be presumed to continue over a
short term pattern. I try to keep to the following classification:
short term = less than three months; medium term = less than one
year; long term = one year or more. But the terms are essentially
relative.

**Time limit:** The period equivalent to the formation of a
geometric pattern within which a target must be reached failing
which the prediction will be cancelled.

**Top:** a turn in price on the chart after a rise. By itself,
it has no predictive value. But if it forms into a double top or a
head and shoulders top, it comprises a geometric pattern which may
have predictive value.

**Trend:** A prevailing direction of the market, either up or
down, during the course of a term. Thus the trend is always
relative to the term; ie, short term, medium term or long term.
The short term trend could be up while the long term trend is
still down. One should always be careful when using this term
“trend” to specify the term to which the trend is related.

**Triangle: **A geometric pattern having a top boundary
sloping down or horizontal and a bottom boundary sloping up or
horizontal such that the two lines intersect at an apex. The two
boundaries are a support and resistance respectively. So the
pattern requires the price to turn four times before the pattern
can be valid. The triangle is an ambiguous pattern. Breakout could
be in either direction. If the pattern breaks out upside, it
indicates that the trend is up. If the pattern breaks out from the
support (ie, the bottom line), it indicates that the trend is
down. Thus a triangle can be either a reversal pattern or a
continuation pattern.

Triangles can be ascending – the resistance is horizontal – price can be expected to break upside: or descending the support is horizontal – prices can be expected to break downside.

**Turnover:** The currency value of the stock traded or the
total currency value of trade in a market for a period of time,
usually one day. Turnover is used in contradistinction to volume
of shares.

**Upside: **The direction of a breakout in relation to a
geometric pattern or a resistance. A breakout that breaks through
a resistance is referred to as a breakout upside. It portends a
rally.

**Valid pattern: **A geometric pattern that is well formed
and which has the correct volume pattern accompanying it is said
to be valid. Patterns that are not valid are said to be dubious or
doubtful. A valid pattern has a high probability of reaching
target.

**Value:** The same as turnover, i.e., the currency value of a
market or share for a trading period.

**Volume:** A generic term describing the level of activity in
a market but referring specifically to the number of shares traded
in a market or of a particular stock. I use the term in the
general sense to indicate either volume of shares or the value of
turnover for a trading period.

**Wedge:** A triangle with both support and resistance sloping
in the same direction. If the wedge slops down, the wedge is said
to be a falling wedge. Breakout is expected to be upside and the
target will be the top of the wedge. If the wedge slopes up the
implication is bearish and breakout is to be expected downside
with the target being the lowest turn in the wedge. Volume should
fall off during the formation of the wedge and the duration of
formation should not exceed a few months.

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